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Student

Date

Period

12-6

Computing the Annual Interest and Annual Yield of a Bond Investment

When you buy bonds you are lending your money to a corporation or the government for a specified period of time. A bond is a written pledge that you’ll be repaid your money plus interest at its maturity date (anywhere from 10 to 30 years). How long you keep a bond and how often it

pays interest determines the value of your bond.

Example Find the annual yield rounded to the nearest hundredth percent.

Morgana LeFey purchased a $7,500 bond at the quoted price of 91 rate of 6.5 percent.

  • 1.

    Find the bond cost. Bond Cost Face Value Percent $7,500 91.5% $6,862.50 bond cost

  • 2.

    Find the annual interest. Annual Interest Face Value Interest Rate $7,500 6.5% $487.50 annual interest

  • 3.

    Find the annual yield. Annual Yield Annual Interest Bond Cost $487.50 $6,862.50 7.10% annual yield

1_ 2

. The bond paid an interest

Face Value

Quoted

Cost of

Interest

Annual

Annual

of Bond

Price

Bond

Rate

Interest

Yield

c. c. c. c.

Practice Find the cost of the bond, the annual interest, and the annual yield.

75

1 4

92

1 2

102

101

5 8

1.

$ 4,000

2.

12,000

3.

3,500

4.

5,775

7.00%

b.

7.50%

b.

6.75%

b.

8.40%

b.

a. a. a. a.

5. Felix Capistrano purchased 5 bonds at $1,000 per bond and paid a 1 percent brokerage commission on the principal. The bonds were offered at a quoted price of 101 and earn an annual interest rate of 7.25 percent. What is the total cost of Capistrano’s purchase? What total interest will he earn each year? 6 . A l H o l m a n p u r c h a s e d a $ 1 2 , 0 0 0 c i t y b o n d a t a q u o t e d p r i c e o f 7 9 1 _ 4 . S t a n d a r d i z e d T e s t P r a c t The city board pays annual interest at a rate of 5.8 percent. What is the annual yield on the bond? i c e

A. 7.29%

B. 7.32%

C. 7.34%

D. 7.36%

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Section 12-6

Study Guide

85

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